Fitch Downgrades Hartford's Debt & Life Ratings; Outlook Negative

Source: Fitch Ratings
May 12, 2009

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has downgraded the following Hartford Financial Services Group, Inc. (HFSG) ratings:

--Issuer Default Rating (IDR) to 'BBB' from 'BBB+';

--Senior debt to 'BBB-' from 'BBB'.

Fitch has also downgraded the Insurer Financial Strength (IFS) ratings of HFSG's primary life insurance subsidiaries to 'A-' from 'A'. In addition, Fitch has affirmed the 'A+' IFS ratings of HFSG's property/casualty insurance subsidiaries. The Rating Outlook is Negative. (A full list of rating actions follows at the end of this release.)

The downgrade reflects Fitch's updated view of Hartford's primary life insurance subsidiaries in light of continued challenges in the first quarter and public statements by management concerning the suspension of its annuity sales in various international operations and the exploration of options concerning its institutional markets division. The current rating reflects a more modest degree of potential support from HFSG's property/casualty operations than previously incorporated into the ratings and is a step closer to a stand alone rating for the life insurance subsidiaries.

Relative to the property/casualty operation, Fitch believes that the life operation holds the majority of risky assets and has greater earnings volatility due to variable annuity benefit guarantees, while the property/casualty operation has continued to produce favorable underwriting results. Consequently, the primary life insurance subsidiaries now maintain IFS ratings two notches below the property/casualty operating subsidiaries. Additional factors include reduced estimates of GAAP profitability in its life operations going forward and continued declines in capitalization in the first quarter of 2009 that have increased financial leverage.

Fitch's Negative Outlook reflects HFSG's exposure to the currently volatile credit and equity market conditions, which continue to negatively affect the organization's capital position and earnings outlook, particularly in its variable annuity business. If the company suffers additional significant losses, or experiences further declines in capital, the ratings could be lowered.

HFSG posted a first quarter 2009 GAAP net loss of $1.2 billion, driven by an after-tax charge of $1.5 billion related to its DAC unlock or reduced estimates of the profitability of its variable annuity business. As a result, shareholders' equity declined $1.4 billion, or 15% in the first three months of 2009 to $7.9 billion at March 31, 2009. This increased HFSG's equity credit adjusted debt-to-total capital ratio (including accumulated other comprehensive income (AOCI)) to 34.9% at March 31, 2009, up from 31.9% at Dec. 31, 2008.

HFSG maintains financial flexibility with approximately $1 billion available in holding company cash following the company's repayment of $375 million borrowed under the Federal Reserve's Commercial Paper Funding Facility. The source of this remaining cash is primarily the $1 billion from Allianz SE that was not contributed to the life insurance operations followings Allianz's $2.5 billion investment in Hartford in the fourth quarter of 2008. Additional financial flexibility is provided through a $1.9 billion revolving credit facility and a $500 million contingent capital facility.

HFSG's life insurance capital position has weakened somewhat thus far in 2009 with statutory capital and surplus down $445 million to $5.6 billion at March 31, 2009. Fitch notes that this statutory surplus amount includes a benefit of approximately $1 billion for permitted practices currently granted by the Connecticut Department of Insurance that Fitch excludes from its analysis of the life insurance company's capital position. The company estimated that risk-based capital (RBC) at March 31, 2009 is in the range of 420% to 430% compared to 462% at year-end 2008. Excluding the permitted practices benefit, Fitch estimates an RBC range of 345% to 355% at March 31, 2009, compared to 387% at Dec. 31, 2008. Isolating the impact of equity markets only, the company also expects that, given existing enterprise capital resources, it should be able to maintain a 325% RBC at year-end 2009, with an S&P 500 Index value of 700.

Fitch believes that HFSG's hedging strategy has aided in reducing the effect of the unprecedented market declines to manageable levels. However, the impact of hedging relative to capital is material, and shows an increasing reliance on the performance of counterparties, although properly collateralized.

Fitch has downgraded the following ratings with a Negative Rating Outlook:

Hartford Financial Services Group, Inc.

--Long-Term IDR to 'BBB' from 'BBB+';

--$275 million 7.90% notes due 2010 to 'BBB-' from 'BBB';

--$400 million 5.25% notes due 2011 to 'BBB-' from 'BBB';

--$319 million 4.625% notes due 2013 to 'BBB-' from 'BBB';

--$199 million 4.75% notes due 2014 to 'BBB-' from 'BBB';

--$200 million 7.3% notes due 2015 to 'BBB-' from 'BBB';

--$300 million 5.5% notes due 2016 to 'BBB-' from 'BBB';

--$499 million 5.375% notes due 2017 to 'BBB-' from 'BBB';

--$500 million 6.3% notes due 2018 to 'BBB-' from 'BBB';

--$499 million 6% notes due 2019 to 'BBB-' from 'BBB';

--$298 million 5.95% notes due 2036 to 'BBB-' from 'BBB';

--$323 million 6.1% notes due 2041 to 'BBB-' from 'BBB';

--$500 million 8.125% junior subordinated debentures due 2068 to 'BB+' from 'BBB-';

--$1.75 billion 10% junior subordinated debentures due 2068 to 'BB+' from 'BBB-'.

Hartford Life, Inc.

--Long-term IDR to 'BBB' from 'BBB+';

--$147 million 7.65% notes due 2027 to 'BBB-' from 'BBB';

--$92 million 7.375% notes due 2031 to 'BBB-' from 'BBB'.

Hartford Life Global Funding

--Secured notes program to 'A-' from 'A'.

Hartford Life Institutional Funding

--Secured notes program to 'A-' from 'A'.

Hartford Life and Accident Insurance Company

--IFS to 'A-' from 'A'.

Hartford Life Insurance Company

--IFS to 'A-' from 'A';

--Medium-term note program to 'BBB+' from 'A-'.

Hartford Life and Annuity Insurance Company

--IFS to 'A-' from 'A'.

Fitch has affirmed the IFS rating of the following members of the Hartford Fire Insurance Intercompany Pool at 'A+' with a Negative Rating Outlook:

--Hartford Fire Insurance Company;

--Nutmeg Insurance Company;

--Hartford Accident & Indemnity Company;

--Hartford Casualty Insurance Company;

--Twin City Fire Insurance Company;

--Pacific Insurance Company, Limited;

--Property and Casualty Insurance Company of Hartford;

--Sentinel Insurance Company, Ltd.;

--Hartford Insurance Company of Illinois;

--Hartford Insurance Company of the Midwest;

--Hartford Underwriters Insurance Company;

--Hartford Insurance Company of the Southeast;

--Hartford Lloyd's Insurance Company;

--Trumbull Insurance Company.

Fitch has affirmed the following ratings with a Negative Rating Outlook:

Hartford Financial Services Group, Inc.

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Hartford Life, Inc.

--Short-term IDR at 'F2'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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